BoJ extends its forward guidance, South Korean GDP plunges

Summary:

• Bank of Japan assured its would keep low interest rates at least through spring 2020
• Gloomy signs for the first quarter from Asia as South Korean GDP falls the most since the last financial crisis
• Big names release their earnings, Wall Street finishes Wednesday’s trading lower

BoJ renews its pledge

As broadly expected the Bank of Japan kept interest rates on hold this morning and slightly adjusted its inflation projections. Now, the BoJ expects core price growth in the 2020/2021 fiscal year to be 1.4% instead of 1.5% seen in January. The remaining CPI and GDP forecasts were left unchanged. Simultaneously, the Japanese central bank extended its current forward guidance suggesting that extremely low rates will stay at least until spring 2020. In our view it is not a big game-changer in terms of Japanese monetary policy as such a shift could have been anticipated given the weakening growth momentum across the globe. The central bank also kept its pledge to buy JGBs in a flexible manner so its holdings increase at the annual pace of around 80 trillion JPY. The yield curve control mechanism, keeping the target for a 10Y yield at around zero, was also maintained with two votes against it (the same was seen in the past meetings). On top of that, the BoJ will keep the pace of increasing ETF holdings and consider introducing a lending facility for these holdings - this would make it possible to temporarily lend ETFs to market participants. Neither the Japanese stock market nor the yen responded materially to the BoJ’s announcement. Hence, as long as the BoJ is a long way off from monetary tightening, the yen should remain a funding currency being apt to rise during market turmoil.

The USDJPY is hovering around 112 in early European trading hours. A move beyond this area could allow bulls to climb with the major resistance localized in the neighborhood of 114.3. The first more notable support may be found at 109.8. Source: xStation5

Gloomy signs from Asia, another set of solid earnings from the US

Writing about the Japanese economy it is worth mentioning a South Korean GDP reading for the first quarter. It showed that the Asian economy contracted 0.3% QoQ, coming in well below expectations signalling a 0.3% QoQ increase. This was the worst result since the end of 2008. In annual terms a rate of growth slowed to 1.8% from 3.1% while the consensus had called for a 2.5% rise. Although private consumption rose only 0.1% QoQ, the slowest pace since the first quarter of 2016, a tremendous disappointment came from investment spending plunging as much as 10.8% QoQ, the worst result since the beginning of 1998. It seems that the South Korean economy, being the export-driven one, is suffering from global trade tensions in conjunction with an economic slowdown in China. This is not a reassuring signal for Asian economies in general.

The South Korean economy expanded in the first quarter in annual terms at the slowest pace since the last financial crisis. Source: Bloomberg

Finally let us write a few words about the ongoing earnings season in the United States. After the closing bell on Wednesday we got financial reports from companies like Microsoft, Visa, PayPal and Tesla. Except for Tesla we got a set of positive surprises in terms of EPS and revenue. Moreover, despite the cooling economic activity PayPal revised up its EPS guidance for this fiscal year. The company now expects earnings per share to be between $2.94 and $3.01 compared to $2.84-2.91 seen recently. In turn, Tesla reported another loss which turned out to be higher than expected (-$2.9 vs. -$1.3). The company reaffirmed its guidance for 360-400k deliveries this year. In after hours trading Microsoft shares jumped, Visa shares declined, PayPal shares made a moderate increase while Tesla shares fell.

In the other news:

• Moody’s said that increased risk aversion was impacting weaker Chinese companies